This week’s blog post in our “Financial Planter” series is written by Megan Poore, a Financial Services Professional.*
401(k) Options When Leaving Your Job
If you’re leaving your job, one of your most important decisions is what to do with your 401(k) account. Even if the size of the account seems relatively small, saving money for retirement is important and should never be ignored. Here is a look at your options:
Leave the money in the plan
One option available to you is leaving your money in the plan provided by your old company. Employers are required to allow this unless your account balance is too small.
The advantage of doing this would be if the company's plan is low cost and offers an outstanding menu of investment options. This might be the case for a larger company with the buying power to offer an array of low cost institutional-style investment options.
If your account balance is $5,000 or less, your old employer might send you a check for the balance, or roll your money into an IRA account they establish for former employees. You’ll want to check with your benefits department to ensure that you understand your options. A distribution of funds can involve taxes and potential penalties if not handled correctly.
Roll the money over to a new employer's 401(k)
If you’re changing jobs and your new employer's plan allows it, a good option might be to roll your balance to the new plan. You’ll want to perform the same type of due diligence to ensure that the new plan offers a solid menu of low cost investment options.
One advantage is having one fewer account to manage. Another advantage is that your account balance will be a bit bigger and if the plan distributes any money to participants via forfeitures or revenue sharing, your “piece of the pie” might be a little bit larger.
Roll the money to an IRA
Another option is to roll your 401(k) account into an IRA at an outside custodian. This option will allow you the greatest flexibly in how your money can be invested. An IRA can also be a lower cost option if your old 401(k) account was expensive.
If you have several old retirement accounts, an IRA can be a great place to consolidate them. This allows you to manage your retirement money from one place, and can simplify your financial life.
You’ll want to be cognizant if a financial advisor pushes you to do a rollover. Under the new fiduciary rules, they are required to put your interests first when suggesting a rollover, but it’s still wise to understand the costs and benefits of what they’re proposing.
Note that if part of your 401(k) account is in a Roth option, this money will need to be rolled to a Roth IRA, with the rest to a traditional IRA account.
Take a distribution
Distributions from a traditional 401(k) are always taxable, and may be subject to a 10%penalty if you’re under age 59 ½. There are exceptions to the penalties under certain situations.
For a Roth 401(k) distribution to be tax-free and penalty free you must be at least age 59 ½ and at least five years must have elapsed since your first contribution to this Roth 401(k) account.
In most cases, taking a distribution after leaving a job is a poor choice. When you factor in the taxes and possible penalties, this is a very expensive source of funds. Additionally, you lose the benefits of tax-deferred compounding in a retirement account until your retirement date.
For those aged 59 ½ or over there are no penalties for taking a distribution from a traditional 401(k). There are some special rules for those who are at least age 55 when separating from their employer that allow you to avoid the 10% penalty.
When leaving a job, it’s important to make a decision regarding your 401(k) account. Do your homework and make the best decision for your situation. Don't ignore this leftover money. Even small amounts can grow over time and help you achieve your goal of a comfortable retirement.
*All content provided in this blog is supplied by Roger Wohlner and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
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